Header Link List

Tuesday, November 9, 2010

The Bakken Play the Oil Majors Are Watching Closely

The best new shale oil play you’ve never heard of is getting ready to explode onto investors’ radar early in 2011....the Alberta Bakken.

Located on either side of the Alberta/Montana border, the key land packages in this play have been assembled with very little news or fanfare – but by some very smart and successful companies, like Crescent Point (CPG-TSX) in Canada, and Rosetta Resources (ROSE-NASD), Newfield Exploration (NFX-NYSE) and Murphy Oil (MUR-NYSE).

But these larger companies have been very tightlipped about their plans, and aside from Crescent Point’s one press release this fall, it’s not easy to get information, because everybody is still trying to buy more land. To date, there are only a handful of juniors involved in the Alberta Bakken, but juniors and the bigger intermediate producers are all putting a lot of money into this play hoping it will be just like the Saskatchewan and North Dakota Bakken play to the east, which created tens of billions of dollars in shareholder wealth and many buyouts, corporate takeovers, over the last 5 years. Recent reports by Canadian brokerage firms agree. So the play is gaining momentum but hasn’t become mainstream yet.

That will change in the coming months. The historical geological evidence is intriguing, even compelling. But there is still only one well that has been publicly reported in the whole play, though several have been drilled. And despite the fact that the Alberta and North Dakota/Saskatchewan Bakken plays have completely different geological settings, huge land prices have been paid for big parcels of Alberta Bakken land in areas where truly, very little is known about the oil formations (yes this will likely be a multi zone play if it works).

This play was discovered on the US side of the border, in Montana. And while there has actually been a lot more activity on the US side, but you have to look hard to find mention of it. Rosetta, Newfield, Murphy and Quicksilver (KWK-NYSE) have each acquired roughly 300,000 acres in northern Montana in this play, a material land position even for companies this size, but you won’t find that information anywhere except in a couple lines buried deep in their quarterly statements. Rosetta said in its quarterly released just last week they had acquired more ground. Rarely do any of them include even one slide on this play on their corporate powerpoint. Rosetta and Newfield have each publicly said they are drilling 8 wells, though most of them now are vertical test wells, which the industry calls “strat” wells, which is short for stratigraphy.

Basically they’re trying to gather geological information and determine the best place to drill a more expensive horizontal well. No results have been released to date. But I can tell by reading the research reports on these companies that the analysts down in the US are watching this play. So are the majors, which did not participate much in the shale gas or shale oil boom in North America.

On the Canadian side, land prices around the Montana border edged up consistently this year, going from a low of $83 per hectare ($33.20/acre; 2.5 acres in a hectare) to $1535/ha, or $614 per acre, taking a lot of industry people by surprise at the time. The highest price paid for one small block was over $4500/ha, or $1800/acre. Crescent Point came clean in September when they announced they had acquired over 1,000,000 acres in the play, mostly via an acquisition of a private company, Darian, which had a substantial land position, but also through some freehold staking on their own. Most of the land in the area was bought up by land brokers, a whole sub-industry in the oilpatch that acts as "front men" for the oil producers. That is not unusual.

It is unusual to see a well licensed in the name of a land broker, which is what has happened with the one well in the Alberta Bakken that everyone is watching, here is a quick quote from BMO Nesbitt on this well: “In Alberta, one horizontal well has been drilled and completed targeting the Alberta Bakken (drilled under broker: Antelope Land Services 14-7-1-21W4: TD – Wabamum; results confidential). A second horizontal well is presently drilling (Antelope Land Services 16-24-2-25W4, licensed to the Exshaw, spudded August 17, 2010), and a third horizontal well licensed by Antelope Land Services located at 3-8-1-18W4 has also been drilled and rig released on October 3, 2010, to the Exshaw. It is believed that Crescent Point Energy is the operator of these three wells.”

The few juniors in the Alberta Bakken play stand to be richly rewarded if it works out as well as the early movers hope. This will also be good news for their shareholders, here is how Macquarie Capital sees the Alberta Bakken playing out for them: “Junior companies with meaningful, strategically situated lands will be purchased outright by mid/large cap producers who seek to bolt on additional acreage to already established positions. The potential exists that players who were late to the game may try to establish a position in the play via a small corporate acquisition, once some of the associated risks have been mitigated by the early comers.” In my next two stories on this fast emerging play, I will compare what is known about it to the Saskatchewan/North Dakota Bakken, and list the junior companies involved on both sides of the border.